Tuesday, July 24, 2018

Turkey maintains rate despite rising inflation, weak lira

Turkey's central bank surprised financial markets by keeping its policy rate steady at 17.75 percent despite soaring inflation and a plunging lira, but repeated its recent guidance that it would maintain a a tight policy stance until the outlook for inflation improves and even raise rates further if necessary.
The Central Bank of the Republic of Turkey (CBRT), which was widely expected to raise its benchmark one-week repo rate by another percentage point following a larger-than-expected jump in June inflation to 15.4 percent, indicated it expects inflation to decelerate by saying inflation expectations and prices were lagging recent policy tightening and domestic demand is falling.
The central bank's policy decision was highly anticipated by investors who have become deeply concerned over the CBRT's independence and ability to control inflation after President Tayyip Erdogan's son-in-law was appointed treasury and finance minister, and Erdogan issued a decree that gives him control over who is appointed as CBRT governor and deputy governors.
The verdict by financial markets over the central bank's policy decision, seen as a litmus test of the CBRT's independence, was swift.
The lira, which has already fallen 20 percent this year, fell by another 2.6 percent to 4.76 per U.S. dollar while Turkish stocks fell by 1.65 percent.
Prior to the snap election in late June that handed Erdogan extended powers, the CBRT had tightened its policy sharply in response to rising inflation.
In May the central bank then simplified its operational framework by setting the one-week repo rate as its key policy rate and raised it twice by a total of 975 basis points.

The Central Bank of the Republic of Turkey issued the following statement:

Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while signs of decelaration in domestic demand become more visible.

Cost factors and volatility in food prices have been the main drivers of the recent upsurge in inflation. On the other hand, price increases have shown a generalized pattern across subsectors. Despite the milder impact of demand conditions on inflation, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee assessed that it might be necessary to maintain a tight monetary stance for an extended period.

The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days."